Trade Leveraged ETFs Based on the Underlying Index

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MINYANVILLE ORIGINAL As a follow-up to my previous article on How to Trade Leveraged ETFs, I wanted to give a specific example of a technically-oriented trade that I am executing using the VelocityShares Daily 2x VIX Short-Term ETN (TVIX).

When deciding when and how to make a trade based on technical analysis using leveraged ETFs, it is much more effective to use the chart of underlying benchmark index instead of a chart of the ETF itself. As previously mentioned in my earlier article, leveraged ETFs are fantastic vehicles for trading, but they can and will have tracking issues, which means that they will not always perform exactly the same as the benchmark index that they are supposed to track.

So let's take a look at the chart of the Volatility Index (^VIX). It can be seen clearly that technically the VIX has been an uptrend since March with higher highs and higher lows. More importantly it has completed a classic 2B Double Bottom Pattern. The 2B Double Bottom Pattern, or dragon pattern, is a technical chart pattern made famous by "Trader Vic," Victor Sperandeo.

This pattern is very similar to the classic Double Bottom Pattern, where prices retest a previous support level bounce off and close higher. The difference is that the 2B Double Bottom is only valid if the most recent support level dips below the previous support level, then reverses and close above it.

This is an extremely bullish signal since the market is saying that buyers are overwhelming sellers every time prices dip near previous support levels, and this is exactly what has happened with the VIX.

As you can see on the chart of the VIX below, the previous support level on May 22 was taken out, and then immediately VIX reversed upwards to not only close above previous support, but to end up almost 10% at the close.

Click to enlarge

Thus with a combination of a clear uptrend and the completion of a double bottom on the chart of the VIX, now is a great time to buy the only leveraged ETN that track the VIX: the VelocityShares Daily 2x VIX Short-Term ETN.

No other VIX-related ETF gives you the leverage (2X the VIX), liquidity (TVIX trades on average more than 10 million shares per day), and ease of use (TVIX can be traded in any account even IRAs) as the VelocityShares Daily 2x VIX Short-Term ETN.

Also the VelocityShares Daily 2x VIX Short-Term ETN is an excellent way to hedge a long stock portfolio; since I believe the VIX is about to make significant move upwards, this will spell doom for stocks in the short term.

On another note, I received some excellent feedback on my article on How to Trade Leveraged ETFs. One comment that was consistently mentioned was the daily resetting of leveraged ETFs, and how this can negatively affect the ETF's returns over a longer holding period.

Let me first say this is a great point to bring up. Yes, as I previously mentioned, leveraged ETFs are not perfect products; they do have tracking errors and resetting issues.

But as someone who spent his entire career analyzing leveraged ETFs, the resetting and tracking errors are very small on a daily basis (1% to 2% at most, which may sound like a lot, but keep in mind that many of these ETFs can go up or down 10% or more in a day).

Also as I mentioned, there is no other equity-based alternative product out there that offers the leverage and liquidity of leveraged ETFs, so for now these are the best products out there for leveraged short-term trading and hedging.

For more information on which specific leveraged ETFs are the best to trade, backtested and proven highly profitable trading strategies, daily trading ideas based on macro and market news, or money management, please contact Global Investor Monthly.